In the field of anti money laundering, many lawyers fall into the trap of conflating source of funds with source of wealth. They treat them as a single requirement when they are in fact two distinct obligations. One is a forensic look at a specific pot of money. The other is a holistic assessment of a lifetime of accumulation. By failing to distinguish between the two, law firms create a false sense of security that leaves them fundamentally exposed to regulatory scrutiny.
As one MLRO put it bluntly: there is a near total absence of regulatory guidance on what an acceptable check even looks like. That uncertainty is not just frustrating. It is risky.
Source of funds is the where
This is the issue most firms focus on. Where did the money for this transaction come from? On paper, it sounds manageable. In reality, it rarely is. A single property purchase can involve accounts across multiple banks. A gift from a parent might be split into separate payments. This creates a maze of transfers that makes the audit trail hard to follow even when nothing is wrong.
It is traceable in theory. In practice, most firms do their best and move on. Electronic ID checks help, but they often stop short of giving a complete picture. The result is a process that feels thorough but is not always watertight.
Source of wealth is the why
This is where things get uncomfortable. How did this client build their wealth over time? There is no standard approach. There is no consistent evidence threshold and no clear line between acceptable and inadequate.
Most AML tools do what they are designed to do. They verify identity. They screen against sanctions. They provide only recent financial data. But they do not answer the real question. They do not connect the dots between a clean identity check and a credible explanation of how someone accumulated significant wealth.
The audit reality
In many firms that I audit, fee earners revisit source of funds again and again on the same file. Meanwhile, source of wealth remains largely unexamined. It sits in the background, assumed rather than evidenced. That is the illusion. The process may, to the MLRO at least, look robust. The reality is that the foundation is missing.
The SRA and FCA expect adequate checks, but many firms believe that the regulators have not clearly defined what adequate means. That leaves firms exposed. Decisions are based on judgement calls without clear benchmarks. Documentation may be detailed, but still fall short of an undefined standard.
Until source of wealth is treated with the same rigour as source of funds, this gap will remain. And right now, it is a gap the legal industry is quietly stepping around.